The quiet side of economic development

While state and local governments make the headlines, foundations take risks, test ideas and redefine the term

David Fettig | Editor

Published January 1, 1996  | January 1996 issue

About 20 years ago when Brenda St. Germaine, executive director of the American Indian Business Development Corp., first approached foundations about granting money for economic purposes, they were generally unwilling to consider her ideas.

"When we came along and said 'economic development,' that was a new word. It freaked them out," she says. Now, foundation executives visit the Business Development Corp. in Minneapolis and are responsive to her plans and requests. "They really have changed their approach."

The term "economic development," as it's played out in politics and in the media, is often associated with the practice of various levels of government working to lure companies or to encourage business growth through the use of such financial tools as low-interest loans, tax abatements and tax increment financing. But beneath the headlines of these relatively large-scale attempts to spur business, are the more quiet methods of foundations.

Historically, foundations have given much of their funding to human or social services, education and the arts. While most still dedicate a large portion of their annual grants to such programs, within the last decade or so—at least among the larger foundations in the Ninth District—there has been a growing emphasis on economic development. Whereas in the early '80s many foundations dedicated little or no funds toward economic development, of a total $313.3 million granted by Minnesota's 74 largest foundations to Minnesota recipients in 1992, $33.7 million was directed to community improvement programs and $2.7 million expressly toward economic development, according to the latest figures available from the Minnesota Council on Foundations.

In addition to the increasing presence of foundations in economic development, there has also been an evolving sense of what economic development means. When a foundation grants money to a local organization to study the interrelationships of various government agencies, they might call it economic development. And a foundation may call it economic development when it funds a program to develop leadership qualities among residents of small towns or city neighborhoods, or commissions a study on the flow of dollars into and out of Indian reservations, or grants funds for the study of how states can most effectively distribute reduced funds under proposed block grants.

As Jim Scott, president of the First Interstate Bank System of Montana Foundation, puts it: "Economic development is one of those phrases that really means too much."Scott would know; in addition to his position at First Interstate, he is on the board of the Northwest Area Foundation in St. Paul, which funds economic programs in its region, and he has been active with the Montana Community Foundation, which, like community foundations established in many states and cities, works to strengthen all aspects of a community's life, including its economy. These foundations, along with many others, make millions of dollars of grants every year to organizations throughout the Ninth District and beyond, and many of those grants go toward efforts to encourage economic development.

Faltering of resource industries spurs involvement of foundations

Three of Minnesota's largest foundations have come to play a big role in economic development over the past 10 years—McKnight, Blandin and Northwest Area. Together, the three foundations have assets of over $1.5 billion and they make annual grants of more than $70 million. McKnight and Blandin make their grants within Minnesota, but Northwest Area funds projects in Minnesota, the Dakotas, Montana and on to the Northwest coast.

For Northwest Area, the move to economic development began in the mid-'80s, following retrenchments in such natural resource industries as agriculture, timber, mining and oil. At that time, the Northwest Area board decided to shift its focus from higher education, arts and human services, to concentrate on the economic revitalization of its eight-state region.

Much of Northwest Area's earlier efforts in economic development revolved around small business creation, including loan funds and providing technical assistance to entrepreneurs, according to Cris Stainbrook, senior program officer at Northwest Area. While the foundation still cares about those issues, it has also broadened its thinking over time, Stainbrook says, and now considers other issues that impact economic development, like work force preparation, housing stock and the effect of public policies on local economies. What the foundation is not doing is committing funds to large, high-impact and risky ideas. "We aren't putting up a million bucks for someone to go out and get a chopsticks factory, for example," Stainbrook says with a smile, referring to a failed attempt to establish a chopsticks factory in Hibbing, Minn.

Northwest Area has devoted many resources to the idea of sustainability in recent years, which the foundation generally defines as development based on economic and environmental considerations. In essence, Stainbrook says, sustainability is also an attempt to lessen the negative impacts of the boom and bust cycles that the Northwest region often experiences.

While Northwest Area hasn't been successful in all its economic development efforts over time, it has had some success in aiding the development of small business, in analyzing work force issues for cities and regions, in establishing a program to reduce mortgage foreclosures and in addressing other housing issues.

"Our role is more than giving money to do economic development, it's to test ideas and put them out to the public," Stainbrook says, sounding a theme echoed by other foundation officials. "That's about all we have resources for." One idea that didn't succeed for Northwest Area was flexible manufacturing networks, which were meant to bring manufacturers together to create a product that, individually, they would not be able to produce. After funding five separate networks without ever producing a jointly manufactured product, Northwest Area abandoned the idea—not surprisingly, individual manufacturers were just too geared to the profitability of their own business to agree to work with other like-minded companies.

Stainbrook acknowledges that the idea of self-interested businesses sharing profit opportunities was fraught with problems from the beginning, but the foundation stuck with the experiment in order to thoroughly test the idea. In the end, the idea wasn't completely without benefit; some manufacturers formed information networks, akin to local trade associations.

Giving the funding responsibility to local communities and regions

At McKnight, the idea to create six separate funding organizations throughout Minnesota was driven partly by the foundation's perception that it was too focused on urban issues, partly as a response to the agricultural downturn of the 1980s, and partly because the foundation believed that local organizations could best decide what programs to support in their area. Known as Initiative Funds, these six organizations are governed by a local board representing various sectors of a region. According to Michael O'Keefe, McKnight executive vice president, all six Initiative Funds put a high premium on economic development—about half of the combined $114 million budget for the six funds goes toward economic-related programs.

For the most part, when Initiative Funds do economic development, they support programs that provide business assistance and also some venture capital. O'Keefe says the foundation sometimes prods the Initiative Funds to take more risks, on the theory that if they aren't willing to take some chances on rural Minnesota, then nobody will.

Like other foundation efforts, one thing the Initiative Funds don't get involved with is competition among themselves by trying to lure businesses from other regions, or even from other states. "Smokestack chasing in the United States is idiotic," O'Keefe says.At first, many Initiative Funds supported existing businesses, like retail or other services, that ultimately didn't bring new jobs or wealth into a community, but mainly preserved what was already there. Today, the Initiative Funds, in part, help to start new enterprises, and often with success, O'Keefe says. A salmon farm in northern Minnesota failed, but the Initiative Funds are still supporting other new enterprises: one Initiative Fund is providing partial funding for a biologist who is starting an exotic mushroom farm, another has provided financing for a new egg-cracking plant that has proven successful, and another has supported a new cookie/bakery operation.

McKnight—which still has a strong presence in the Twin Cities metro area—is in the process of reviewing the six Initiative Funds, including audits and an analysis of the organization's plans. In conjunction with the reviews, the foundation has commissioned a study of trends in rural Minnesota and has encouraged the boards of the Initiative Funds to think regionally, beyond the boundaries of their communities and their particular funding region. "We try to give relatively few directives, but we do an awful lot of issue-raising and challenging," O'Keefe says.

O'Keefe lists a number of businesses in rural Minnesota that he has become acquainted with over the years, and he chides what he considers an urban attitude that doesn't recognize the degree of business sophistication in rural Minnesota. "There is no shortage of smart, entrepreneurial behavior in Greater Minnesota." Focusing on three issues:

  1. Manufacturing
  2. Housing
  3. Agriculture

Paul Olson, president of the Blandin Foundation in Grand Rapids, Minn., would agree with that assessment of rural Minnesota's business acumen—his foundation's mission, quite simply, is to strengthen rural Minnesota communities. To achieve that end, in recent years Blandin has funded programs that develop leadership qualities in rural communities, that improve and develop educational and cultural opportunities, and that investigate environmental issues, among many others. Currently, the foundation has developed a plan that will concentrate Blandin's economic development efforts on three areas:

  1. Expand the manufacturing sector of the state's rural economy through continuation of the Sota Tec Fund, which was created by Blandin in cooperation with the University of Minnesota to develop an industrial extension service. Over the past two years, there have been a minimum of five research initiatives funded at the University; three have resulted in licensed technologies and one of those became a start-up corporation—a farm equipment manufacturer—with Sota Tec sharing an equity position. Olson hopes that within 10 years Sota Tec can become a self-sustaining fund.

  2. The second focus of Blandin's economic funding will be to support the housing needs for regional trade center communities that are experiencing industrial expansion. Called Minnesota Development Bank, Blandin will underwrite $1 million annually through 2000 to support the construction of low-income, affordable housing. Currently, Olson says, towns that are growing are unable to house required workers, causing long, economically unproductive commutes and creating communities where workers have no vested interest in community life.

  3. nd third, the foundation will attempt to further the discussion of agricultural issues by holding conferences and other events, and to focus attention on certain sectors of the agricultural industry that are vulnerable to decline, like dairy, hog farming and poultry. "If you really want to improve people's lives, you have to improve production," Olson says, and the greatest engine of that economic growth is human capital—which puts a premium on education. And that's one of the important roles that foundations can play, he says; through research and experimental programs, foundations can help communities do the hard work of learning what works, and then help communities apply those lessons.